1.) Danny is considering a stock purchase. The stock pays a constant annual dividend of $2.00 per share and is currently trading at $20. Dannys required rate of return for this stock is 12%. Should he buy this stock?

2.) This year, Shoreline Light and Gas (SL&G) paid its stockholders an annual dividend of $3 a share. A major brokerage firm recently put out a report on SL&G predicting that the companys annual dividends would grow at the rate of 10% per year for each of the next five years and then level off and grow at 6% thereafter.

*Use the variable-growth DVM and a required rate of return of 12% to find the maximum price you should be willing to pay for this stock.

*Redo the SL&G problem in part a, this time assuming that after year 5, dividends stop growing altogether (for year 6 and beyond, g=0). Use all the other information given to find the stocks intrinsic value.

*Contrast your two answers and comment on your findings. How important is growth to this valuation model?